The popularity of private equity as a way to diversify
portfolios has many investors searching the secondary market
for interests in buyout funds raised by firms such as KKR &
Co. and Blackstone Group.

These buyers will have to pay up due to the heightened
interest in the secondary market as way of gaining exposure to
private-equity. Pricing is particularly good at the
moment, said Patrick Adefuye, Preqins head of
secondaries, in a phone interview. He said the gap between the
net asset value of the stakes and the discount is at its
narrowest historically.

That means its a good time to be a seller on the
secondary market, where theres an abundance of buyer
interest. Private-capital secondaries funds raised a record $13.6 billion during the first
quarter, while private-equity firms are also on a tear raising
capital, according to financial data provider Preqin.

Buyers used to get bigger discounts to NAV several
years ago; the pricing has gotten closer to par as more money
has poured into the market, said Mike Earley, private
equity partner at Jones Day.

Andres Hefti, partner at Multiplicity Partners, adviser to
secondary buyers, says that while its true that for
assets like those owned by large private equity firms - think
KKR and Blackstone - buyers are paying par value,
those looking for deals tied to middle-market private-equity
firms are still able to find assets at a discount.

According to investment banking firm Greenhill & Co.,
secondary markets saw alternative-asset deals priced at an
average 89 percent of net asset value last year, a slight
decrease from 90 percent in 2015. Buyout funds again priced
higher last year than any other strategy, at 95 percent of NAV,
Greenhill said in a February statement, adding that it was a
100 basis point increase over the prior year.

Alternative-asset prices in the secondary market have
rebounded from the 2008 financial crisis, when private-equity
interests traded around 63 percent of their value, according to
Adefuye, citing Greenhill data.

Theres a lot of dry powder, Adefuye said.
Secondaries have raised to big funds - theres a lot
of money to put into the market. In the next two years there
will be increasingly more activity in the market.

Asset managers are attracted to secondary deals partly
because they have a clearer picture of what theyre buying
compared to when they contribute capital to private-equity
funds that have yet to make investments.

Secondaries on the surface are lower risk, Mathieu Drean, managing partner at Triago,
said by phone. They have assets you can
evaluate.

Investors like that they can see how deals are performing
under the ownership of a private-equity firm and that they only
have to hold the investment for three or four years, which
gives them greater liquidity, according to Drean.

Theres another aspect driving interest in the
secondary market. Some private-equity funds have held certain
assets for 10 to 12 years and are opting to invest more in
their deals, to continue building their value, rather than sell
them at a lower than expected return, according to Adefuye.
Instead of staying along for the ride, he said, some
private-equity fund investors become impatient to get their
money back and choose to sell their private-equity interests in
the secondary markets.

From the start of 2016 through March, nearly half a trillion
dollars have been raised for private-equity investment, driving
dry powder to a record $842 billion, according to a Preqin report. In the first three months of 2017,
buyout funds raised $54.4 billion, up from $50.1 billion during
the same period last year.

The private equity market as a whole has garnered more
interest in recent years, Earley said. The buyout
market has become more efficient. The same thing has become
true for secondaries - as more people realize there is good
money to be had there, that market becomes more
efficient.